Do you know your net worth? Projecting it out can keep your financial goals on track.

Every quarter, public companies are required to report their finances to shareholders ad potential investors. These reports can significantly alter stock prices and company value if anything defies expectations, even slightly. The core of the financial report is a balance sheet, an income statement, and a statement of cash flows and then there are a lot of pages of explanations and projections. With personal finance, also, it is a good idea for you to generate similar financial reports on a regular basis, at least yearly. It can help you detect and adjust when things start moving outside your guardrails. My last post was about the income statement, otherwise known as a budget. This one will talk about the balance sheet, or net worth statement.

Unlike a budget which reports income and expenses over a given time frame (maybe monthly or annually), the balance sheet is a snapshot in time. How much are you worth on the date that you enter the numbers? It will change each time you check it.

Calculating net worth is a simple, really. The equation is this:

Net Worth = Assets - Liabilities

It becomes a little more complicated in business when you have things like accounts-receivable and accounts-liable (money coming in or going out that is promised but hasn't happened yet). But in personal finance, it should remain fairly straightforward. You just have to account for everything that you own (assets) and subtract everything that you owe (liabilities).

What are some examples of assets? If you can sell it or exchange it for money, it is an asset. The bigger assets in our lives are usually things like our bank accounts, our investment accounts, our house, our cars, sometimes jewelry or art. But, if you want to get really detailed, you can add in all the personal property in your house or cluttering your garage like furniture, electronics, clothing, mountain bikes, kayaks, etc., etc.

Keep in mind when you are projecting your future net worth that it matters if a particular asset is likely to appreciate or more likely to lose value over time. Most of the personal items, including your automobiles, start depreciating as soon as you buy them. Yes, you can sell them for money, but not as much money as you paid for them. So, that depreciation should be factored into your future asset value projection (otherwise known as a pro-forma.)

The types of assets that are going to build your net worth are the ones that appreciate: interest-bearing bank accounts, investment accounts, real estate property, some collectables, etc. Those are what you should focus on accumulating if you want to achieve true wealth--not filling up your balance sheet with depreciating assets.

How about liabilities? These are everything that you owe. They usually consist of revolving debt like credit cards and then more long-term debt like mortgages, student loans, car loans, etc. Remember that most debt carries an interest charge, so it will grow over time unless you are paying down more than the interest.

You generally want to get rid of high-interest rate debt as soon as possible. How quickly to pay off low-interest rate debt depends on how you feel about debt and what kind of appreciating asset you could acquire with the money instead. That decision should always be made in context of how it will affect your net worth.

Final Thoughts:

Building net worth is about increasing assets and paying down liabilities. Keep in mind that paying for an asset by adding a liability isn't doing much, if anything, for your net worth. It depends on how much you expect that asset to grow and how much you are paying to finance it. Generally adding a liability for a depreciating asset is always going to be a drag on your net worth.

True wealth happens when your assets are large enough and your liabilities small enough that you can live on the growth and are no longer reliant on a paycheck. That is not going to happen overnight and if not done purposefully with smart investing and disciplined spending. Just adding depreciating assets with liabilities to pay for them is surely not going to get you there.

When you are doing it right, you can see your net worth grow exponentially. I built a net worth calculator tool that will help you know where you are currently and project 10 years ahead based on expected rates of return for your assets and interest payments on your liabilities. It can be found on my website financial tools page here. You will need to be able to modify the Excel sheet to your particular situation, but you can download if for free to get you started.

If you would like a more detailed plan to build your wealth, consider becoming a client. Here is a link to set up a free exploratory consultation: https://calendly.com/bryan_jepson/30min

Disclaimer: the material in this blog post is intended for general educational purposes only and should not be considered specific financial advice. You should always consult with your personal financial advisor to see how it might fit within your personalized financial plan.